For all you self-employed and landlords – this is a quick heads up. Company owners, you do need to know about this as well.
Back in March 2015, the government announced the end of the tax return and we all jumped for joy (except for accountants of course). Well, that state of play is getting closer for the freelancers/self-employed people and landlords if their income from this type of source is over £10,000.
Consultation documents were issued by HMRC in August 2016 all about “making tax digital” (MTD). The idea is that individuals with income which is not taxed at source greater than £10,000, will need to do quarterly reporting to HMRC via online accounting systems or apps, or via a standalone system that can send data directly to HMRC. Gone will be the days of using excel (other spreadsheet systems are available) to collate your numbers and then load the totals onto the HMRC portal. You will note that it says income, not profit. HMRC require that everybody caught will need to keep their records online, and these records include your bank transactions for your business whether it is a bank account, credit card or PayPal type systems; sales invoices, purchase invoices & receipts, plus records of cash spend and income.
The idea being is that these records are entered or electronically loaded on a regular basis, and at the end of each quarter (or more if you want to), a summary of data is transmitted to HMRC within 30 days of the quarter end. It is only a summary of the data in specified categories and not actual copies of receipts and invoices.
The consultation documents propose that this kicks off from April 2018, and the first reporting could be as early as May 2018 depending on how people want to set up their reporting. The maximum time between reporting is three months. At the end of the year, there is a nine-month period that you can amend your numbers of any adjustment like mileage allowance, home office calculations, accruals, etc. So the numbers have to be finalised by the 31st December (if your year end is 31st March) or 5th January (if the year-end is 5th April). So the 31st January will not exist when this comes in. You lose a month.
What people may not realise is if you have a year that is not the 31st March/5th April, for example, a teacher may pick 31st August for a school year. Then you still have quarterly reporting, but your final assessment deadline is nine months after the 31st August (31st May) rather than 31st January 18 months later. That is doing to be a huge change for these people as they will be effectively working on three tax returns at the same time rather than two. The year end of 31st August 2019 ends in tax year 2019/2020 would need to be on the tax return by the 31st Jan 2021 under the old scheme, but under Making Tax Digital, it needs to be finalised to the tax man by 31st May 2020.
There are specific exemptions noted in this consultation:
- Self-employed businesses and landlords with income below £10000;
- Community Amateur Sports Clubs;
- Insolvent businesses and insolvency practitioner;
- The Digitally Excluded, e. those without computers or broadband, or for other reasons.
To add a nail in the coffin a bit more, unlike self-assessment tax returns and payroll systems, HMRC will not be providing any free software for MTD. They are looking to the software providers to make available free software for the smallest of businesses, but commercially why would the software companies do this. It is more likely that the software is something that the company needs to pay for on a monthly basis and find ways of making it work for them and that then just adds to the administrative burden & cost for the business. I am already looking at package solutions for clients to overcome the problems of MTD from a DIY & review pack through to a fully serviced option. More on that another time.
I’ve seen things on social media sites that people are saying this is voluntary and you don’t have to do it. That is not correct. All self-employed businesses will have to go down this route unless they are in the exemption categories. The bits that are optional is if you use a cash accounting method, if you want to report more frequently than quarterly, or if you want to make payments on account after each reporting period.
Of course, if you don’t file things on time each quarter, there will be a penalty system. At the moment they are proposing that if you are late, you get a “point”, and once you have 4 points, you get a penalty. Those 4 points stay for 24 months, and each time you get another point when you have 4, another penalty. Of course, this is up for question as well.
If you run your company, don’t sit there and smirk as VAT registered companies will come into the game on the current rollout programme from April 2019, and all companies from April 2020.
As I say, this is still at the consultation stage that ends on the 7th November. Some people think the final plan will come out with the finance bill on the 23rd November; others believe it will be finalised in March 2017. A critical area of concern is the start date being April 2018 and if it should be April 2019. The starting level of £10,000 is being questioned of being too low and a look at the VAT threshold (£83,000 of income) before this comes into play.
I’ll be keeping a close eye on this as it will affect most of my clients. One of the best things you can do at the moment is take out that second personal bank account as your business account and get used to putting all your business transactions through it. Leave your real personal account as private costs like rent/mortgage, council tax, utilities, food, clothing, having fun, etc. Just do transfers from the “business account” to the real personal account when needed. When the MTD reporting comes on board, you only have one account to deal with and process through to an accounting system for HMRC. Also start to look at accounting systems and what they can do for you. At the moment, we will be considering Xero as the accounting system linked with Receipt Bank or Entryless for taking photos of receipts to load into Xero and Tripcatcher for mileage records.
If you have any questions, please feel free to ask. As this gets closer, I’ll probably need to get a support desk system in place, and use an FAQ page on my website to help people get through the pain of all this.
Should you desire to read the documents and put your opinion to HMRC, then the documents can be found >>> HERE <<<